With hyperinflation, Venezuela’s cryptocurrency is magical unrealism

Venezuela on Aug. 20 will release its new fiat currency in an attempt to tame its out of control inflation. As part of this initiative, the country is linking its new sovereign bolivar to the country’s state-backed cryptocurrency, the petro, which was released in February. This will not end well.

For years, the oil-rich country has been in severe economic decline. It is virtually impossible to obtain the simplest consumer products, let alone the cash to buy them. Medicines and many foodstuffs no longer are available to the average citizen. With inflation estimated at 1 million percent, President Nicolas Maduro’s cure is that the bills for his country’s new fiat currency will have five fewer zeros, rather than the originally planned cut of three zeroes. Other than that change, the currency is merely a reissue of the old one, with an added fancy stamp.

{mosads}To make matters worse, the sovereign bolivar is pegged to the petro, Venezuela’s sovereign digital currency, itself opaquely backed by the country’s oil reserves. The Venezuelan government went all out to get in the cryptocurrency world with its initial coin offering. It published a white paper touting the new currency as a safe bet for investors and released a buyer’s guide to facilitate transactions. Maduro bragged that Caracas had raised more than $5 billion through the token’s presale. His government adopted laws to establish cryptocurrency exchanges within Venezuela.

There was no stopping Maduro thereafter, as he spent petros like his predecessor Hugo Chavez spent petro dollars back in the good old days. In May, Maduro announced the launch of a petro-funded cryptocurrency bank to support youth and student projects. The Venezuelan government began funding social programs using the petro. In July, the Ministry of Housing announced a plan for homeless housing construction funded by petros. SENIAT, Venezuela’s tax and revenue authority, has announced that Venezuelans can use the petro to pay their tax liabilities. The sovereign cyptocurrency is used by the state oil company, Petróleos de Venezuela (PDVSA), as an official accounting unit.

As of Monday, the petro will be interchangeable with the new fiat currency, further muddying Venezuela’s economy.

Venezuela’s use of the petro undoubtedly will be hampered by U.S. sanctions. In May, following sham elections in which Maduro won reelection, President Trump signed an executive order barring U.S. companies and citizens from buying Venezuelan debt or accounts receivable from the Venezuelan government, including those from PDVSA, the parent company of Citgo. The U.S. government rightly wants to stem the corruption that Maduro and members of his government use to enrich themselves, and to stop Caracas from paying off interest on the country’s ballooning national debt.   

Venezuela’s use of the petro reinforces the unfortunate reputation that cryptocurrency has earned. Government officials around the world view cryptocurrency as a threat to the global monetary system and a mechanism to funnel ill-gotten gains, such as mobster cash, narco-dollars, and terror funds.

It is no secret that some Venezuelan financial institutions and state entities act as intermediaries for Colombian drug dealers and Lebanese terrorists. Cryptocurrencies help nogoodniks hide their black-market revenues. You can be sure that the Caracas cartel will try to use the petro to launder the remaining bits of Venezuela’s national treasury and productive economy that they steal.  

But not all cryptocurrency activities are nefarious. These financial technologies can act as a hedge for legitimate investors and ordinary citizens. In late 2016, Venezuelans began buying bitcoins to counter the effect of the sharp decline in the value of the soon-to-be-retired currency, the bolivar. Cryptocurrencies and the blockchain technology that undergirds them are about unleashing the potential of humanity by eliminating intermediaries, transaction costs and government intervention — all of which takes a bite out of legitimate businesses, especially in a dictatorship such as Venezuela.  

That the Venezuelan government will control the price of the petro does not augur well for crypto traders. The petro is designed to be a distributed stablecoin, a type of cryptocurrency that couples the independence and decentralization of blockchain transactions with the price stability of traditional financial assets like gold and fiat currency. The only trouble is that the petro is built on a house of cards.

The markets are not impressed. There is little confidence in Maduro’s government, whether it is in the cryptoworld or the world of its official fiat currency. With out-of-control state spending and hyperinflation, the petro will, like the refurbished sovereign bolivar, collapse.

International investors should consider staying away from the sovereign cryptocurrency coming out of Venezuela, as they should from the country’s new fiat currency. The only sure thing about Venezuela’s economy is increasing pain for the country’s beleaguered citizens.

James M. Cooper is a professor of law and director of the International Legal Studies Program at California Western School of Law in San Diego. He has consulted for the U.S. Department of Justice, U.S. Department of State, the Organization of American States, and governments around Latin America. He is co-founder of the One World Blockchain Alliance and an adviser to Truechain, a Chinese blockchain company based in Singapore.